– Broc Romanek

Yesterday, the SEC posted this Sunshine Act notice of an open Commission meeting next Wednesday – December 5th – to consider a “request for comment” on the nature & content of quarterly reports and earnings releases. As we’ve blogged several times, the request is bound to seek comment on the reduction (and even elimination) of quarterly reporting – as tweeted by President Trump. Here’s an excerpt from this WSJ article that John is quoted in:

One question the SEC may ask in its release, up for a vote next Wednesday, is whether quarterly guidance about expected earnings from companies unnecessarily drives expectations for investors, and whether that guidance could be pared back. Earnings guidance is voluntary and isn’t required by the government. Among possible changes, the SEC could also reduce the number of disclosures required in quarterly reports, which some companies view as excessive in an age when company information is readily available to the public.

“Do we really need the ’thou shalts’ from the SEC in an age when we have so much more information at our fingertips?” said John Jenkins, partner at Calfee, Halter & Griswold LLP and an editor of TheCorporateCounsel.net.

Federal securities rules have required quarterly reporting since 1970, when the SEC required it as part of a formalization of stock-exchange practices that preceded the agency’s creation in 1934. The SEC’s planned meeting isn’t the start of a formal rule-making process and is intended to solicit feedback on how the quarterly reporting system is functioning and what improvements could be made, a step that could in the future lead to regulatory changes.

– Broc Romanek

From Willis Towers Watson, here’s a summary of recent reports published by BlackRock, Vanguard, State Street Global Advisors and CalPERS about their stewardship, including executive pay and shareholder engagement…

– Broc Romanek

Yes, you can get caught for not disclosing perks – and deferred comp – in other countries. Here’s the intro from this WSJ article:

Nissan Motor said it has uncovered numerous significant acts of misconduct by Carlos Ghosn and intends to oust him as chairman. Nissan released a statement Monday about Mr. Ghosn amid news reports in Japan that he was about to be arrested. Nissan said its investigation had been going on for several months.

It said Mr. Ghosn has been reporting compensation amounts in securities reports that were less than the actual amount. Nissan said that in regards to Mr. Ghosn, “numerous other significant acts of misconduct have been uncovered, such as personal use of company assets.” Mr. Ghosn wasn’t immediately available for comment.

The Japanese news reports said Mr. Ghosn was being interrogated on charges that he understated his income, causing the company to file allegedly false reports to Japanese securities regulators. Mr. Ghosn is also chief executive of French car maker Renault SA and chairman of Mitsubishi Motors Corp. Renault shares fell 13% in European trading on the news, which came out after the close of trading in Tokyo.

Here’s an article showing that the top-paid executives in Japan weren’t in fact Japanese, but rather mostly Westerners. Japanese companies tend to pay CEOs less, partly because of cultural ‘modesty’ norms. But this CNN report details how Japan’s corporate culture allows corruption to thrive…

– Broc Romanek

As I blogged yesterday over on TheCorporateCounsel.net, the SEC recently published a larger list than usual to be reviewed last week as part of the SEC’s annual exercise – as required under the Regulatory Flexibility Act – to review how the agency’s rules are faring for smaller reporting companies. This year’s list boasts 43 rules (compare that to 2004; only 7 rules). Like in prior years, the rules listed for review aren’t limited to rules that affect small companies. And notably, the list doesn’t include the elimination of quarterly reports entirely for smaller companies – which I do think will eventually be proposed based upon comments made by Corp Fin Bill Hinman at an ABA meeting a few weeks ago.

What is the “biggie” on this list of rules to be reviewed? The executive pay & related-party disclosures rule amendments of 2006 (which was a huge overhaul for those old enough to remember) – see pages 5-6 of the list…and see the rest of my commentary on this development in this blog…

– Broc Romanek

Last week, as noted in this Steve Quinlivan blog, ISS released five “preliminary” compensation FAQs, which includes a one-year deferral of its controversial policy over excessive director pay. There are no changes to the quantitative pay-for-performance screens nor changes to the passing scores for Equity Plan Scorecard (EPSC) evaluations of stock plan proposals (but there are new EPSC ‘overriding’ factors and a change to the change-in-control vesting factor). “Final” FAQs are expected in a few weeks…

– Liz Dunshee

Yesterday, ISS announced the 2019 updates to its proxy voting policies. We’re posting memos in our “Proxy Advisors” Practice Area (also see this blog from Exequity’s Ed Hauder – and this Davis Polk blog). Here’s the highlights for US companies – except as otherwise noted, the policies apply to meetings held on or after February 1st:

1. Board Diversity: Beginning in 2020 for Russell 3000 and S&P 1500 companies, the chair of the nominating committee (or other directors on a case-by-case basis) will receive an “against” recommendation when there are no women on the company’s board. Mitigating factors include a firm commitment in the proxy statement to appoint at least one female director in the near term, the presence of a female on the board at the preceding annual meeting, or other relevant factors.

2. Economic Value Added Data: During 2019, ISS research reports will feature Economic Value Added data as a supplement to GAAP-based measures that measure the alignment between CEO pay & company performance. Moving into 2020, ISS will consider the inclusion of EVA-based measurements as part of its Financial Performance Assessment methodology.

3. Board Meeting Attendance: ISS is codifying its case-by-case approach to chronic poor attendance without reasonable justification. In addition to voting against the director(s) with poor attendance, it will recommend voting against other directors. After three years of poor attendance, the policy applies to the chair of the nominating or governance committee; after four years, the full committee; and after five years, all nominees.

4. Management Proposals to Ratify Existing Charter or Bylaw Provisions: Similar to Glass Lewis’s new policy on conflicting & excluded proposals, ISS is codifying its policy to vote against individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions – taking into account factors such as the presence of a shareholder proposal addressing the same issue, the board’s rationale for seeking ratification, the actions to be taken by the board should the ratification proposal fail, whether the current provision was adopted in response to the shareholder proposal, previous use of ratification proposals to exclude shareholder proposals, the company’s ownership structure, etc.

5. Board Responsiveness to Ratification Proposals: ISS’s existing responsiveness policy is updated to reflect that failure to act on a failed “ratification” proposal will trigger a board responsiveness analysis at the next annual meeting.

6. Director Performance Evaluations: When identifying companies that have long-term underperformance, ISS will look at three- and five-year TSR during the initial screen – rather than using five-year TSR as part of a secondary step in the evaluation.

7. Reverse Stock Splits: ISS broadened its policy to allow analysts to take a case-by-case approach for companies that are not listed on major stock exchange and may have a legitimate need to carry out a reverse stock split. ISS is also broadening the factors it will consider for all companies – exchange listed and non-exchange listed, where substantial risks exist.

8. E&S Proposals: ISS is codifying its case-by-case approach to E&S proposals – to make more explicit that significant controversies, fines, penalties or litigation are considered.

– Liz Dunshee

The repeal of Section 162(m) means that there’s no longer a tax reason for companies to stick to objective financial metrics for incentive plans. And although institutional investors and proxy advisors continue to prefer measurable “performance-based” pay, some shareholders have also been advocating for pay structures that would incentivize achievement of E&S goals. This blog from Pearl Meyer’s Jim Heim says that, based on an informal survey with 138 responses, compensation committees and boards might have some appetite for change. But don’t expect any big shifts in the near-term. Here’s more detail:

– A sizeable minority (35% of board respondents and 25% of management respondents) affirm that they either anticipate or have already determined they will place greater emphasis on non-financial criteria in 2019. We suspect that very few of these respondents will use such non-financial measures as the cornerstone of their incentive plans. Instead, they are likely to incorporate individual or strategic goals as a modifier (e.g., increase or decrease calculated payout by 10%) to financial result-driven formulae, or as stand-alone goals that account for less than 25% of total incentive plan opportunity.

– There is a stark contrast between the percentage of management respondents (40%) vs. board respondents (19%) who simply indicate they are not considering this approach. This echoes earlier polls we have conducted which indicated that boards are more open to consideration of ESG (Environmental, Social, and Governance) measures than management teams, possibly because they feel they are under pressure from the investor community to at least explore the topic.

Jim goes on to note that shareholders are receptive to qualitative measures if the company can clearly articulate the goals, how achievement would yield shareholder value, and how the compensation committee ensures performance is rigorously assessed. If you’re thinking of going down this path, here’s some planning advice:

Companies that are contemplating a shift in the mix of measures included in their incentive plans would be well served to stress-test these designs (modeling various performance and “what if” scenarios) before the end of the year. Where non-financial statement measures are part of the mix, we encourage companies to game plan for pay disclosures. How might the new plan design be described in the CD&A section of next year’s proxy statement? Would the board support above target payouts on such measures even if the pay trend ran counter to income statement and/or shareholder return trends? How would such a result be explained to the investor community?

– Broc Romanek

Here’s an excerpt from this Wachtell Lipton memo:

1. Identify Grandfathered Arrangements. Determine whether any compensatory arrangements that were in effect on November 2, 2017 are grandfathered under the transition rule based on current IRS guidance. All documentation relating to a compensation arrangement should be considered when evaluating the grandfathered status of an arrangement that includes negative discretion.

2. Do Not Inadvertently Degrandfather. Avoid any non-essential “material modification” to grandfathered arrangements, which Notice 2018-68 defines as an amendment that increases, or accelerates (without a time-value discount) the payment of, compensation. Companies should understand when arrangements expire, renew or need to be extended and the impact on grandfathering.

3. Maintain Clear Records. In order to identify grandfathered arrangements and protect their grandfathered status, companies should maintain clear records of the state of their compensation programs as of November 2, 2017, including accrued balances as of that date.

4. Make a List of Covered Employees. The revisions to Section 162(m) provide that, if an individual becomes a covered employee during any taxable year beginning on or after January 1, 2017, he or she will remain a covered employee indefinitely. Since the covered employee population is backward-looking and continually expanding, companies should maintain a list of all covered employees and review it annually for updates.

5. Consider Which Employees Are Executive Officers. Only an executive officer can become a covered employee under Section 162(m). As such, companies should carefully assess the classification of individuals as “executive officers” under Rule 3b-7 of the Securities Exchange Act of 1934.

6. Structuring New Compensation Arrangements. When structuring new compensation arrangements, consider whether payments can be spread out over multiple years (rather than paid in a lump sum) in order to avoid the recipient being classified as a covered employee or to keep payments to a covered employee below $1 million per year.

7. Maintain a Committee of Outside Directors. Maintain a committee composed solely of two or more individuals constituting “outside directors” under Section 162(m) for purposes of administering grandfathered arrangements. Accordingly, companies with grandfathered arrangements should not remove questions related to Section 162(m) from D&O questionnaires.

8. Review Proxy Disclosure. Review annual proxy disclosure to determine whether it needs to be updated to reflect the changes to Section 162(m) or related changes to incentive plans.

9. Review New or Amended Equity Plans. If seeking approval of a new or amended equity incentive plan, review the plan document to remove any references to the performance-based compensation exception that are no longer operative. At the same time, companies should consider whether certain provisions originally driven by Section 162(m) requirements, such as annual limits on awards to individuals and a list of performance goals, should be retained based on the expectations of stockholders.

10. Consider Treatment of Cash Incentive Plans. It is no longer necessary for cash incentive plans to be approved by stockholders. Accordingly, companies should consider whether to maintain their existing stockholder-approved cash plans. Note that maintaining a filed plan should avoid the need for disclosure on Form 8-K when a bonus is granted to a named executive officer.

11. Update Deferred Compensation Plans. Review and, if necessary, update deferred compensation plans under which payments are triggered based on deductibility not being disallowed by Section 162(m), taking into account compliance with Section 409A of the Internal Revenue Code.

– Broc Romanek

This memo from Farient Advisors is interesting. Here’s an excerpt:

Even when companies are careful about plan leverage in the performance range between threshold and maximum awards, they often plant a big incentive land mine right at the threshold. One of the most common compensation structures in the corporate world is to have between 25 percent and 50 percent of target awards suddenly cut in when a threshold level of performance is achieved. At this point, the pay-for-performance curve is not just steep, it is vertical. To managers, that might mean millions of bonus dollars for hitting their number, or zero if they fall a dollar short.

– Broc Romanek

Here’s an excerpt from this Compensia memo about how technology companies fared when seeking shareholder approval of stock plans:

In 2018, the number of employee stock plans proposals in the technology sector declined from prior years. Only 17% (26 of 150 companies) of the Tech 150 submitted employee stock plan proposals to their shareholders in the past 12 months (based on a review of definitive proxy statements filed for companies with fiscal years ending during the period from June 1, 2017 through May 31, 2018). This number is significantly lower than the practices of representative publicly-traded technology companies that we reviewed in each of the prior three years (26% in our Bay Area Tech 120 reviews in both 2015 and 2016 and 31% in our Tech 150 review in 2017).